Growth in Sale of Founder-Owned Businesses
A recent report by Pitchbook shows that the sale of founder-owned businesses has been growing over the past seven years. The share of M&A deals with founder-owned companies as targets reached 61.5% in Q1-23.
The report highlights some interesting points.
Founder-owned companies are increasingly attractive targets for corporate and financial sponsor acquirers due to several key factors. Firstly, these businesses are often easier to transform and “professionalise,” allowing acquirers to extract growth more easily. Since founder-owned companies are unlikely to have received previous funding from sponsors or external capital sources, new owners can start with a clean slate, free from any baggage from prior owners or conflicting cultures.
Furthermore, founder-owned businesses typically have minimal debt on their balance sheets, making it easier to leverage them financially for acquiring other companies or funding capital investment programs. Any existing debt can potentially be replaced with cheaper debt, leading to improved bottom-line performance.
Founder-owned businesses are often the result of years, or even decades, of hard work before achieving financial stability. When it comes time for the founder to monetise their efforts, decision-making typically rests with a single individual or a few generations of a single family. This simplicity, compared to ownership structures with complex capital tables and multiple stock classes, voting rights, proxy requirements, and regulatory approvals, makes a fast-growing founder-owned business highly desirable to acquirers.
Additionally, there is a growing population of ageing founders who lack succession plans for their privately held companies. Data shows that only a small percentage of family-owned businesses successfully transition to the next generation. It is estimated that only 30% of family-owned businesses survive the transition from first-to second-generation ownership, and 12% survive the handoff from the second generation to the third.
Deals involving founder-owned companies typically occur with transaction sizes of $100 million or less. These deals often come at a significant discount compared to larger corporate- or sponsor-backed transactions.
Companies acquired for less than $100 million have lower enterprise value to earnings before interest, taxes, depreciation, and amortization (EV/EBITDA) multiples than businesses in larger size brackets.
For firms under $100 million, the median EV/EBITDA multiple in 2022 was 6.8x, while the next size bracket ($100 million-$250 million) had a median multiple of 11.4x—a notable 40.3% difference. Although these smaller deals account for the majority of deal count, their lower valuations and smaller sizes contribute to a smaller share of total deal value, amounting to 37.3% by the end of 2022. However, the share of total deal value attributed to non-backed companies has been increasing since 2018, reaching 43.5% in 2023.
In summary, founder-owned companies present enticing opportunities for acquirers due to their potential for transformation, lack of external funding baggage, minimal debt, and simplified ownership structures. The ageing demographic of founders and their limited succession plans further contribute to the appeal of selling to a corporate or financial sponsor.
If you would like to discuss in confidence succession plan vs a sale contact us now.
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